Thyroid hormone (T3) and retinoic acid (RA) are essential for normal vertebrate development and are known to coregulate several genes. Early development is predominantly retinoic acid sensitive, yet thyroid hormone receptor-alpha (T3R alpha) is expressed along with retinoic acid receptors (RAR)-alpha, -beta, and -gamma. To determine the role of unliganded T3R alpha in early development and on RA-stimulated neural development, we used homologous recombination techniques to inactivate both T3R alpha gene alleles in mouse embryonic stem (ES) cells. Loss of both T3R alpha alleles resulted in an increase in basal and RA-induced expression of the endogenous RA-responsive genes, RAR beta and alkaline phosphatase, which demonstrates that T3R alpha has an inhibitory effect on the RA response. A similar magnitude of T3R inhibition of the RA response was seen in transient transfection assays of RA response elements in both ES and assays of RA response elements in both ES and JEG cells. Cotransfection experiments were used to demonstrate that inhibition of the RA response could be mediated by T3R alpha 1. The addition of T3R alpha 1, but not the T3R alpha variant c-erbA alpha 2, to T3R alpha-null ES cells restored the inhibitory effect on RA-induced gene expression. RA-stimulated neural differentiation was seen in the wild-type, but not in T3R alpha-null ES, cells, consistent with reports of abnormal neural development as a consequence of premature RA stimulation. Our results demonstrate that the early expression of unliganded T3R alpha functions to modulate the RA response and RA-stimulated neural differentiation.